Hospitality

1
Chapter 2
Hospitality Operating Structures
2
Hotel (Home Away From Home)

• Conditions
• Law
• Society
• Economy
• Culture
• Education
• Entertainment

• Concepts
• Smile
• Excellent
• Ready
• Viewing
• Inviting
• Creating
• Eye

3
Classify Hotel

• OECD
• Hotels
• Motels
• Inns(Pension)
• BB
• Paraders

• Time share and resort condominiums
• Camps
• Youth Hostels
• Health Spas
• Private Houses

4
Hospitality Operating Structures

• The Importance of Proper Organizational Structure
• Common Hospitality Organizational Structures
• The Hospitality Franchise

5
In This Chapter, You Will Learn

• The various organizational business structures
  used in the hospitality industry.
• Some advantages and disadvantages of alternative
  organizational structures.
• The responsibilities and obligations created by
  an agency relationship.
• The unique business relationship involved in
  franchising.
• How franchise agreements affect the purchase,
  operation, and sale of a franchised hospitality
  operation.

6
The Importance of Proper Organizational Structure

• Ease of formation and maintenance
• Liability
• Taxation
• Terminating or selling the business

7
Common Hospitality Organizational Structures

• Sole proprietorship
• General partnership
• Limited partnership (LP)
• C corporation
• S corporation
• Limited liability company (LLC)

8
Common Hospitality Organizational Structures

• Legalese
• Sole Proprietorship -A business organization in
  which one person owns and, often, operates the
  business.

9
Common Hospitality Organizational Structures

• Legalese
• General Partnership - A business organization
  in which two or more owners agree to share the
  profits of the business, but are also jointly
  and severally liable for its debts.

10
Common Hospitality Organizational Structures

• Legalese
• Limited Partnership - A business organization
  with two classes of owners. The limited
  partner invests in the business, but may not
  exercise control over its operation, in return
  for protection from liability. The general or
  managing partner assumes full control of the
  business operation, but can also be held liable
  for any debts the operation incurs.

11
Common Hospitality Organizational Structures

• Legalese
• General Partner - The entity in a limited
  partnership relationship who makes the
  management decisions and can be held
  responsible for all debts and legal claims
  against the business.

12
Common Hospitality Organizational Structures

• Legalese
• Limited Partner -The entity in a limited
  partnership relationship who is liable only to
  the extent of his or her investment. Limited
  partners have no right to manage the
  partnership.

13
Analyze the Situation 2.1
Nicholas Kostanty formed a limited partnership
with his father-in-law, Ray Sweeney, to open an
upscale French restaurant in a midwestern town.
Mr. Kostanty was the general partner and owned 75
percent of the business. Mr. Sweeney, with 25
percent ownership, was the limited partner and
invested 100,000. After one year, difficulties
in the restaurant's operation caused business to
drop off, and Mr. Kostanty called Mr. Sweeney for
advice.
14
Analyze the Situation 2.1
After hearing of the difficulties, and
concerned with the security of his investment,
Mr. Sweeney traveled from Arizona to Indiana to
visit the operation. Upon observing the operation
for two days, the two partners decided to launch
a large and expensive television ad campaign to
increase flagging sales. Mr. Sweeney designed the
campaign with the help of Seelhoff Advertising
and Video, a local advertising agency
specializing in television commercials.
15
Analyze the Situation 2.1
Despite an immediate increase in sales, volume
continued to decline, and finally, three months
after the ad campaign was launched, the
restaurant closed its doors. Total debts at the
time the restaurant closed equaled 400,000, with
assets of the partnership only being 200,000.
Included in the debt was 150,000 owed to the
advertising agency. The agency sought payment
directly from Mr. Sweeney.
16
Analyze the Situation 2.1
Mr. Sweeney claimed that his liability was
limited to the 100,000 he had previously
invested in the business, and refused to pay any
additional money. The Seelhoff Advertising Agency
sued the limited partnership, as well as Nicholas
Kostanty and Ray Sweeney individually.
17
Analyze the Situation 2.1

• By hiring the advertising agency, did Mr. Sweeney
  forfeit his limited partner status?
• Is Mr. Sweeney liable for the outstanding debts
  of the limited partnership?

18
Common Hospitality Organizational Structures

• Legalese
• Corporation -A group of individuals granted a
  charter, legally recognizing them as a separate
  entity with rights and liabilities distinct from
  those of its members.

19
Common Hospitality Organizational Structures

• Legalese
• Dividend - A portion of profits received by a
  shareholder, usually in relation to his or her
  ownership of a corporation.

20
Common Hospitality Organizational Structures

• Legalese
• S Corporation - A type of business entity that
  offers liability protection to its owners, and
  is exempt from corporate taxation on its
  profits. Some restrictions limit the
  circumstances under which it can be formed.

21
Common Hospitality Organizational Structures

• Legalese
• Limited Liability Company (LLC) - A type of
  business organization that protects the owners
  from liability for debts incurred by the
  business, without the need for some of the
  formal incorporation requirements. The federal
  government does not tax the profits of LLCs
  however, some states do while others do not.

22
Common Hospitality Organizational Structures

• Legalese
• Agent - A person authorized to act for or to
  represent another, usually referred to as the
  principal.

23
Common Hospitality Organizational Structures

• Legalese
• Respondeat Superior - Literally let the
  master respond, a legal theory that holds the
  employer (master) responsible for the acts of
  the employee.

24
Common Hospitality Organizational Structures

• Legalese
• Independent Contractor - A person or entity
  that contracts with another to perform a
  particular task, but whose work is not directed
  or controlled by the hiring party.

25
The Hospitality Franchise

• Legalese
• Franchise - A contract between a parent company
  (franchisor) and an operating company
  (franchisee) to allow the franchisee to run a
  business with the brand name of the parent
  company, as long as the terms of the contract
  concerning methods of operation are followed.

26
Analyze the Situation 2.2
After five years of effort, you develop a
unique style of roasting pork that is extremely
popular in your hometown. You own and operate
five units called Porkies that sell this product.
Each unit costs 175,000 to develop. Total sales
of each unit average 600,000, with a net profit
margin of 10 percent per unit.
27
Analyze the Situation 2.2
A friend of yours discusses your success with
you, and suggests the possibility of opening five
new stores in his or her hometown. Your friend
wants to know what you would charge to sell your
recipe and your standard operating procedures
(SOP) manual, as well as the use of the name
Porkies.
28
Analyze the Situation 2.2

• How would you determine a fair price for your
  experience?
• If your friend is successful, causing the name of
  Porkies to be even better known, thus resulting
  in greater demand for franchises, should your
  friend share in future revenue from franchise
  sales?
• What are the ethical issues at play here?

29
The Hospitality Franchise

• Legalese
• License - Legal permission to do a certain
  thing or operate in a certain way.

30
The Hospitality Franchise

• Legalese
• License Agreement - A legal document that
  details the specifics of a license.

31
The Hospitality Franchise

• Legalese
• Licensor - One who grants a license.

32
The Hospitality Franchise

• Legalese
• Licensee - One who is granted a license.

33
The Hospitality Franchise

• Legalese
• Disclosure - To reveal fully and honestly.

34
Franchise Rule

• Basic disclosures
• Earnings claims
• Advertised claims
• Franchise agreements
• Refunds
• Contradictory claims

35
Franchise Offering Circular

• Many states treat sales of franchises like
  securities.
• Must file circular of record before selling in
  the state.

36
Franchise Agreement

• Details the rights and responsibilities of the
  franchisor and the franchisee.

37
Operating a Franchise

• Encroachment / impact.
• Purchasing requirements.
• Operations manual changes.
• Renewal clauses.
• Noncompete clauses.

38
Analyze the Situation 2.3
In 2000, Robert Thornburg signs a franchise
agreement with Starbelt Hotels to operate a
full-service hotel under the Starbelt name. His
franchise agreement includes a clause that
prevents Starbelt from granting additional
Starbelt franchises in Mr. Thornburg's market
area without an impact study.
39
Analyze the Situation 2.3
In 2005, Starbelt develops a second hotel brand
that targets upscale travelers who do not desire
the meeting rooms, full-service restaurants, and
indoor pools that define the Starbelt brand. The
new hotels are called Moonbelts, and the
franchisees who purchase this brand are connected
to the same national reservation system as those
franchisees in the Starbelt brand.
40
Analyze the Situation 2.3
Starbelt maintains a separate 800-number for
each brand. However, a guest may book either
hotel type with a call to either 800-number. The
ADR (average daily rate) for a new Moonbelt hotel
equals that of the older Starbelt hotels. In
2010, Mr. Thornburg finds that a franchisor-owned
Moonbelt hotel is to be built across the street
from his hotel.
41
Analyze the Situation 2.3
He protests that many of his customers will
find the Moonbelt hotel desirable, and that his
franchisor has violated the terms of the
franchise agreement by erecting a competing hotel
in his territory. Mr. Thornburg requests a copy
of the impact study he feels should have been
produced by the franchisor. Starbelt Hotels
maintains that Mr. Thornburg has protection only
against other Starbelt hotels, and since Moonbelt
targets a different clientele, no protection
exists, nor should an impact study have been
performed.
42
Analyze the Situation 2.3

• Has Starbelt violated the terms of the franchise
  agreement?
• What steps might Mr. Thornburg take to protect
  his business?

43
The Hospitality Franchise

• Legalese
• Tying Arrangement - An agreement, often
  illegal, requiring that, as a precondition of
  purchasing or obtaining services, other services
  must be purchased and must be purchased through
  the seller.

44
The Hospitality Franchise

• Legalese
• Noncompete Agreement - A contractual agreement
  between two parties in a business relationship
  in which one party, upon termination of the
  business relationship, agrees not to compete
  within a designated geographic area or for a
  designated period of time.

45
Analyze the Situation 2.4
Lo Vin Do was an immigrant from Southeast Asia.
He spent 10 years in the United States operating
a small restaurant that served lunches, dinners,
and carryout baked goods. Later, he bought a
franchise operation that sells European-style,
fresh-baked breads.
46
Analyze the Situation 2.4
A clause in the franchise agreement signed by
Mr. Do prohibited, ...the operation, by Mr. Do,
of a similar business..., within a 10-mile
radius for a period of five years if the
franchise agreement was terminated for any
reason. Mr. Do established the franchise as a
limited partnership. The business was marginally
successful at first, but two years later declared
bankruptcy.
47
Analyze the Situation 2.4
Mr. Do closed the operation and returned all
confidential operating materials to the
franchisor. Afterward, Mr. Do, operating as a
sole proprietor, again opened a small, table
service restaurant serving Vietnamese cuisine and
French pastry products.
48
Analyze the Situation 2.4
This restaurant was located approximately
three miles from his previous restaurant. The
franchisor contacted Mr. Do stating that he must
cease operation of the restaurant/bakery or face
litigation.
49
Analyze the Situation 2.4

• Did Mr. Do violate the terms of the franchise
  agreement?

50
The Hospitality Franchise

• Legalese
• Right of First Refusal - A clause in a
  contractual agreement between two parties in a
  business relationship in which one party, upon
  termination of the business relationship, can
  exercise the right to buy the interest of the
  other party before those rights can be offered
  for sale to another.

51
What Would You Do?
Assume you are responsible for approving
commercial loans at a bank where you are the
senior lending official. You are approached by
two hospitality management college graduates,
each with three years management experience
acquired after they had completed their studies.
They are seeking a loan slightly in excess of 1
million to establish a restaurant in the
community. The funds will be used to lease land,
facilities, and equipment, as well as for
renovation, inventory, salaries, and other
start-up costs.
52
What Would You Do?

• Will the organizational structure selected by the
  partners have an impact on your decision to
  extend the loan?
• What other factors would influence your decision?
  
• Would it make a difference to you if the partners
  were requesting the loan to complete a franchise
  agreement with an established and successful
  franchisor?

53
What Would You Do?

• Would you want to review the specifics of the
  franchise offering circular? Would you want to
  review the franchise agreement?
• What additional information might you request if
  the partners were seeking the loan to operate as
  an independent restaurant? Would it matter if the
  loan were for an existing restaurant, as opposed
  to a new start-up?

54
Rapid Review

• Identify those organizational structures that
  result in paying income taxes based on
  distributed, as compared to earned, profits.
  Explain the advantages of each approach.
• Explain the phrase respondeat superior, in terms
  of liability and organizational structure.
  Describe a real hospitality situation in which
  the phrase takes on meaning.

55
Rapid Review

• Compose a letter to a potential lender addressing
  only the issue of why the organizational
  structure you have selected for your new business
  group makes it advantageous for the lender to
  grant you the loan you have requested.
• State the defining characteristics of six types
  of organizational structures used in the
  hospitality industry as they relate to
• Taxes
• Liability
• Financing
• Transfer of ownership

56
Rapid Review

• List six areas of disclosure addressed by the FTC
  Franchise Rule. Select one of these areas and
  explain why you think it is important.
• Using the World Wide Web, locate the case of a
  recent lawsuit pitting a franchisor against his
  or her franchise company. Discuss the merits of
  the lawsuit. (Hint Try www.findlaw.com).

57
Rapid Review

• Contrast five advantages and five disadvantages
  of operating a restaurant or hotel as a
  franchisee, compared to operating as an
  independent.
• Assume you own a restaurant that is successful in
  part because of a signature menu item with a
  secret recipe. Prepare a noncompete agreement
  for a chef you are hiring that you feel would be
  fair to both of you.